Forming a company in the UK involves making crucial decisions that will significantly influence the success of your business. One such decision is selecting the right corporate structure. In the UK, the corporate structure you choose for your business determines many vital aspects, such as its mode of operations, tax prices, corporate governance structure, shareholder rights, and growth potential.
Like many other countries, the UK company structure is divided into two main categories: private companies and public companies. The debate over private vs. public companies has long been a central topic in discussions about UK company structures, as each type offers advantages and disadvantages. However, determining the right structure for your business involves more than just weighing the pros and cons.
This article will cover:
All you need to know about private and public companies.
The key differences between public and private companies.
The advantages and disadvantages of these company structures.
The factors to consider before transitioning from a private to a public company.
The most frequently asked questions regarding public and private companies.
What is a Private Company?
A private limited company (Ltd) in the UK is a business structure that operates as a separate legal entity from its owners. This means that the company has its own assets, liabilities, and legal responsibilities, distinct from those of the shareholders and directors. As a result, shareholders' personal assets are protected, and their liabilities are limited to the value of their shares should the company become insolvent.
A private company does not issue its shares to the public. The company’s name usually ends with “Ltd” or “Limited.”
To start a private company, you need at least one director and one shareholder, and it's common for these roles to be held by the same person. Furthermore, private companies have a more concentrated ownership structure, often owned by a small group of individuals, families, or investors with a common goal.
Unlike public companies, private limited companies have restrictions on the transfer of shares. Share transfers often require board approval or are governed by specific provisions in the company’s articles of association, such as:
Family ownership provisions: This allows shareholders to freely transfer their shares to certain family members.
Drag-along and tag-along clauses: Protects the interests of majority and minority shareholders in business transactions.
Pre-emption protocol: This Gives existing shareholders the first right to purchase shares before they are offered to others.
Running a private company comes with a lot of benefits:
Control: Owners of private limited companies retain greater control over the business, as they are not subject to the pressures of public shareholders and can make decisions that align closely with their goals.
Privacy: Private companies are not required to disclose as much information as public companies. This means that financial details, ownership, and business strategies can be kept more confidential.
Fewer Regulatory Burdens: Compared to public companies, private limited companies face fewer regulatory requirements. For example, they are not obligated to hold annual general meetings or publish their financial statements to the public, making compliance simpler and less costly.
What is a Public Company?
A public limited company (PLC) in the UK is a type of business structure that is legally permitted to offer its shares to the general public. This is typically done through a stock exchange, allowing the company to raise capital by selling shares to investors.
Under the Companies Act 2006, a public company must have the “Plc” designation after the company name. In addition, it must have a minimum share capital of £50,000, with at least 25% of it being fully paid up. Also, to form a public company, you need a company secretary and at least two directors. One of these directors could double as the company secretary.
A distinctive characteristic of a public company is the ability to raise capital by selling shares to the public. This is usually done through an Initial Public Offering (IPO), where shares are sold to institutional and individual investors. Once listed, members of the public can freely buy and sell these shares. Like private companies, the liability of shareholders in a public company is limited to the amount of shares they have in the company.
Undoubtedly, listing on a stock exchange opens a company to many benefits:
Access to Capital: Going public allows a company to raise substantial amounts of capital, which can be used for expansion, research and development, paying off debt, or other business activities. This is one of the primary reasons companies choose to become PLCs.
Increased Market Visibility: Listing on a stock exchange enhances a company’s visibility and credibility. Being a publicly traded company can attract more customers, partners, and high-quality employees, as well as provide a higher profile in the marketplace.
Share Liquidity: Public listing offers liquidity to shareholders, enabling them to buy and sell shares more easily compared to private companies. This liquidity can also be attractive to investors, making it easier for the company to raise additional funds in the future.
Public companies are subject to strict rules set by the Companies Act 2006 and the Financial Conduct Authority. These rules include requirements for publishing financial reports, holding Annual General Meetings (AGMs), and corporate governance. They are designed to protect investors and improve the level of transparency and accountability in the UK corporate environment.
Key Differences Between Private and Public Companies
When starting a business in the UK, it's important to understand the key differences between a private limited company (Ltd) and a public limited company (PLC) to choose the right structure for your needs.
Aspect | Private Limited Company (Ltd) | Public Limited Company (PLC) |
Ownership | Typically owned by a small group of individuals, families, or investors. | Shares are owned by the general public and institutional investors. |
Share Transferability | Shares are not offered to the public and are often restricted in transferability. | Shares can be freely bought and sold on the stock exchange. |
Regulatory Requirements | Fewer regulatory requirements, no need for a trading certificate, and less disclosure. | Stricter regulations, requires a trading certificate, and must adhere to stock market rules. |
Financial Reporting | Less detailed reporting, with some simplified requirements for smaller companies. | Must file detailed annual and half-yearly reports; more stringent reporting standards. |
Management and Governance | Flexible governance, no mandatory company secretary, AGMs are optional. | Requires a company secretary and must hold Annual General Meetings (AGMs). |
Capital Raising | Capital is raised through private investments or loans. | Capital is raised by offering shares to the public through an IPO. |
Ownership and Shareholders
Ownership in a private company mainly comprises a small group of individuals or shareholders who have a close relationship, typically family members or friends. These shareholders play a major role in controlling the company. If they have majority stock, they can still retain control even after selling some of their shares.
On the other hand, the ownership structure of public companies is diluted. This means that many investors, including institutions, can hold shares in the company, and shareholders play a limited role in its control.
Furthermore, shares in a public company are easily transferable. However, it’s not the same for a private company. Share transfer is restricted by the provisions stipulated in the company’s articles.
Regulatory Requirements
Operating a private company is easier and more flexible because it faces fewer regulatory requirements than public companies. For example, private companies only have to comply with the basic rules set by law.
In contrast, public companies must comply with the rules and regulations set by the Financial Conduct Authority (FCA) and the stock exchange on which they are listed.
Some of the regulatory obligations required of public companies include disclosure of any risk factors and changes in the company’s financial condition, business performance, and leadership. Stock exchanges such as the London Stock Exchange (LSE) may also have regulations, such as adhering to the UK Corporate Governance Code. This high-level scrutiny of public companies is due to their public status, which calls for greater transparency to protect investors.
Another key difference is that a public company requires a trading certificate from Companies House before the business starts. The certificate shows that they have satisfied the minimum capital requirement of £50,000 and have paid up at least 25% of this amount. On the other hand, private companies don’t need a trading certificate to commence business. They can begin once they’ve been registered.
Financial Reporting
The financial reporting obligations of both structures differ in terms of the frequency of the reporting and the details of the reports to be submitted to Companies House. Regarding the frequency of reporting, public companies are required to file financial reports more frequently. In addition to their financial statements, they are required to publish half-year reports within three months of the end of the financial year. On the other hand, private companies do not have to disclose their financial statements or performance to the public. All they need to do is file annual accounts with Companies House.
Additionally, financial statements of public companies are usually required to be comprehensive and in line with the International Financial Reporting Standards (IFRS). It usually includes a balance sheet, profit and loss statement, and many other documents. These documents must also be audited before they are filed with Companies House. However, this is not true for private companies, as they can file an abridged version of their financial accounts.
Management and Governance
Another key difference between public and private companies is their corporate governance structure. Public companies operate a more formal governance structure. They are required to have at least two directors and a company secretary. On the other hand, private companies have a more flexible corporate governance structure. They can operate with just one director without having to appoint a company secretary.
Furthermore, both company structures are managed by a Board of directors. However, the board of a public company is larger and more formal, with clear distinctions between executive and non-executive directors. In contrast, the board of a private company is smaller and informal because the directors are often also the shareholders.
Finally, public companies are required to hold an AGM annually. This gives shareholders a platform to vote on important company matters. In contrast, private companies are not required to hold an AGM except when specified in their articles.
Capital Raising
Due to their governance and management structures, both public and private companies have different capital-raising strategies. Public companies raise capital by issuing shares to the public through IPOs. They can also issue more shares later on to raise more capital.
Private companies, on the other hand, often raise capital through personal savings, loans, and investments from angel investors or venture capitalists.
Pros and Cons of Each Structure
When deciding between a private limited company (Ltd) and a public limited company (PLC), it's important to weigh the advantages and disadvantages of each structure. Here's a breakdown of the key points to consider:
Pros and Cons of Private Companies
Pros
The decision-making process is flexible because there are not many shareholders involved.
Private companies have to deal with lesser regulatory burdens compared to public companies.
Private companies are not required to make financial disclosures to the public, which affords them some privacy regarding their financial and operational information.
Cons
Private companies are limited in how they can raise capital because they don’t have access to capital markets.
Private company shares are not easily transferable, making them overreliant on internal sources to raise capital.
Limited access to capital hinders their growth potential.
Pros and Cons of Public Companies
Pros
Public companies can easily access large amounts of capital through public offerings.
Since listed companies are subject to stringent regulations, this enhances their credibility among customers.
The easy sale and purchase of shares in a public company provides liquidity for shareholders.
Cons
Going public leads to losing control over the company’s direction and decision-making process.
Public companies face higher costs in terms of listing fees, regulatory compliance, and reporting.
Public companies are subjected to strict regulatory burdens and scrutiny.
When to Consider Going Public
Transitioning from a public to a private company is a huge decision that can alter the course of your business. There are several factors to consider when deciding whether or not to make the switch:
Need for Capital Expansion: Going public allows a company to raise significant capital by selling shares to the public. This access to capital markets can provide the necessary funds to grow the business beyond the limitations of private funding.
Shareholder Exit Strategies: An IPO allows early investors and founders to liquidate their holdings, offering a clear exit strategy.
Enhanced Credibility and Market Presence: Public companies benefit from increased visibility and trust, attracting more customers, partners, and top talent.
Market Timing and Valuation: Companies may choose to go public when market conditions are favourable, maximising the potential valuation of their share
Also, a private company can be re-registered as a public company in line with Part 7 of the Companies Act 2006. The process and legal requirements for re-registering as a public company in the UK are as follows:
The decision requires approval from the board of directors and shareholders through the passing of a special resolution. It requires 75% votes in favour of the transition.
The company must meet the minimum share capital requirement of £50,000 and ensure that at least 25% of it is paid.
The company must amend its name and articles to comply with the requirements for a public company.
The company must submit a re-registration application (form RR01) to Companies House and appoint a qualified company secretary.
If the company in question wishes to list on a stock exchange, it must comply with the regulations of that Exchange and any other regulatory requirements set by law.
FAQs
What is the difference between a private and a public company?
A private company does not issue its shares to the public, while a public company allows members of the public to buy and trade its shares.
Can a private company become a public company?
Yes. A private company can be re-registered as a public company by following the requirements set out in Part 7 of the Companies Act 2006.
What are the legal requirements for a public company in the UK?
The legal requirements for a public company in the UK include:
The company must have a minimum of £50,000 in share capital, with at least 25% paid up.
The company must have at least two directors and one company secretary.
The company must obtain a trading certificate from the Companies House before starting business.
The company must make detailed financial disclosures and hold AGMs annually.
Why do some companies remain private?
Some companies remain private because it allows them to retain control over the direction and decision-making process of the business, keep their finances private, and stay accountable to a smaller group of shareholders.
How does going public affect company control and governance?
Once a company goes public, ownership is distributed among its many shareholders, opening it up to more scrutiny from the public. It also imposes stricter governance standards and regulatory compliance requirements.
Conclusion
When starting a business in the UK, you must decide on the best company structure for your company. These structures include private companies and public companies. Understanding the differences between the two is essential for your company's future and potential success.
If you’re looking to start a company and need guidance on the company structure to choose, Lawhive is at your service. Our corporate solicitors have extensive knowledge of all the requirements needed to start your company. We can also help with the appointment of a company secretary and other company-related matters.